PIMCO settles charges of misleading investors about ETF performance

First Published 2nd December 2016

PIMCO to retain an independent compliance consultant and pay nearly $20 million to settle charges that it misled investors about the performance of one its first actively managed ETFs and failed to accurately value certain fund securities.

Andrew J. Ceresney, SEC

The Securities and Exchange Commission has announced that
investment management firm Pacific Investment Management Company
(PIMCO) agreed to retain an independent compliance consultant and
pay nearly $20 million to settle charges that it misled investors
about the performance of one its first actively managed
exchange-traded funds (ETFs) and failed to accurately value
certain fund securities.

According to the SEC's order PIMCO's Total Return ETF attracted
significant investor attention as it outperformed even its
flagship mutual fund in the four months following its launch in
February 2012. The initial performance was attributable to buying
smaller-sized bonds known as "odd lots" as part of a strategy to
help bolster performance out of the gate. But in monthly and
annual reports to investors, PIMCO provided other, misleading
reasons for the ETF's early success and failed to disclose that
the resulting performance from the odd lot strategy was not
sustainable as the fund grew in size.

"PIMCO misled investors about the true long-term impact of its
odd lot strategy and denied them the opportunity to make fully
informed investment decisions about the Total Return ETF," said
Andrew J. Ceresney, Director of the SEC's Division of
Enforcement. "Investment advisers must accurately describe the
significant sources of performance and the strategies being
used."

The SEC's order further finds that PIMCO's odd lot strategy
caused the Total Return ETF to overvalue its portfolio and
consequently fail to accurately price a subset of fund shares.
PIMCO valued these bonds using prices provided by a third-party
pricing vendor for round lots, which are larger-sized bonds
compared to odd lots. By blindly relying on the vendor's price
for round lots without any reasonable basis to believe it
accurately reflected what the fund would receive if it sold the
odd lots, PIMCO overstated the Total Return ETF's net asset value
(NAV) by as much as 31 cents.

"PIMCO overstated its NAV almost every day for four months
because its policies and procedures were not reasonably designed
to properly address issues concerning odd lot pricing," Mr.
Ceresney said.

PIMCO agreed to be censured and consented to the SEC's order
without admitting or denying the findings.

PIMCO agreed to pay disgorgement of fees totaling $1,331,628.74
plus interest of $198,179.04 and a penalty of $18.3 million.